Generally speaking, there’s an advantage to being better-educated. But is this always true? There are actually quite a few cases where education leads people astray. Thus it is often better educated people who say silly things like “IQ doesn’t measure anything important”.
Occasionally, being somewhat well educated leads one astray, whereas being highly educated leads one back to the truth. Consider this question: Would our economy benefit if Americans were to save more?
An uneducated person might say yes, recalling that ever since they were a child they had been told that saving is virtuous. A penny saved is a penny earned. That doesn’t mean that the less educated save a lot of money, just that they believe it is virtuous.
A college grad might recall learning in economics that an increase in saving can reduce aggregate demand, pushing the economy into recession.
Someone with a PhD in economics from Chicago (or a reader of this blog) might understand that saving is virtuous because it leads to more investment, and the Fed will offset any decline in AD due to an increased propensity to save.
I thought of this when reading a NY Review of Books article about vaccinations:
Some of the other factors she mentions are ones I recognize from my own clinics and consultations in Scotland: the steadily widening disparity between the age of first-time mothers at the top and the bottom of society (mothers who have chosen to delay childbearing generally have higher levels of education and are more likely to reject vaccination, considering themselves “experts on their own children”), overconfidence in the power of children to fight off infectious disease thanks to the phenomenal success of vaccination, and the rise among elite groups of “healthism”—the belief that healthy eating and exercise can protect against infectious diseases that, through virtually the whole of human history, have imperiled our lives.
This reminds me of the saving question, with three levels of understanding:
An uneducated mother is likely to trust the doctor who tells her that vaccinations protect the child from disease.
A more educated mother may understand that vaccines impose an external benefit, and then try to free ride off the vaccination of other children in the belief that vaccines are risky.
A mom who is a highly educated medical doctor may understand the external benefit argument, but also understand that there is a lot of misinformation about the risks of vaccines and that even though many of the benefits are external, even the private benefits exceeds the cost.
Conclusion: I little bit of knowledge can be a dangerous thing, but a lot of knowledge is generally helpful.
READER COMMENTS
john hare
May 17 2019 at 8:02pm
I believe it might be more like Thinking you know the answer can be a dangerous thing. That prevents further investigation and thought on the matter.
I think I have read this as attributed to Mark Twain. It ain’t the things we don’t know that kill us so much as the things we know for sure that just ain’t so.
nobody.really
May 19 2019 at 11:57pm
Walter Mondale (October 7, 1984), attributing quote to Will Rogers, New York Times (October 8, 1984) p. B4. Not verified in Rogers’s writings.
Attributed to Josh Billings (Henry Wheeler Shaw) by The Oxford Dictionary of Quotations, 3d ed., p. 491 (1979). Not verified in his writings.
Josh Billings (Henry Wheeler Shaw), Everybody’s Friend, or Josh Billing’s Encyclopedia and Proverbial Philosophy of Wit and Humor (1874).
Phil H
May 17 2019 at 9:23pm
This is a nice post. I’m kinda stuck at the college grad level suggested here. In particular, can I ask about this link in the argument:
“saving is virtuous because it leads to more investment”
I’ve always had trouble understanding this bit. I see that high savings go into the I part of the accounting identity, but that’s a different thing to “doing more investment,” isn’t it? I mean, if I put $1000 under my mattress, I’ve saved it, but I haven’t invested it. What’s the mechanism that takes us from savings (sometimes formally defined as investment) to investment (as in creating future productive assets)?
Ahmed Fares
May 17 2019 at 11:52pm
Yeah, that caught my attention too. Because it’s wrong.
There is no finite pool of saving that different borrowers compete for and thus drive interest rates up when borrowing demands increase. That view was discredited in the 1930s by Keynes (and others). It is based on the loanable funds doctrine which was the mainstay of the neo-classical marginalists. It assumes saving is a function of interest rates rather than income. It assumes that investment (or other sources of spending that relies on borrowing) is constrained by the available pool of saving.
We understand that none of those assumptions or propositions are even slightly correct. Saving is a function of income which, in turn, is a function of aggregate demand (given available aggregate supply). Bank lending is not reserve-constrained (loans create deposits) and so investment funds can be created for any credit-worthy customer at the stroke of a pen. Further, we understand that investment brings forth its own saving as income rises and induced consumption is less than 100 cents in the dollar. —Bill Mitchell
It is also wrong. The loanable funds theory was skewered by John Maynard Keynes in 1936.
Keynes’s logic seems to raise a problem: if income must come before saving, and spending must come before income, how does spending get financed? More specifically, traditional theory presumed that saving finances investment, and traditional theory had already acknowledged the significance of investment as a driver of the capitalist system, as did Keynes’s own theory of effective demand. What Keynes did was to reverse the causal order: investment creates saving—or, more precisely, investment creates the income that can be saved. —L. Randall Wray
Scott Sumner
May 18 2019 at 12:36am
Phil, Saving is defined as the funds that are used to finance investment, so they are equal by definition.
Putting money under your mattress is not saving. If someone gives you $100 and you put it under your mattress then you have indeed saved $100, but the person who gave you the money has dis-saved $100, so aggregate saving does not change.
Phil H
May 18 2019 at 2:49am
Thanks, Scott… I have to admit, I’m still not getting it.
“Saving is defined as the funds that are used to finance investment, so they are equal by definition.”
OK, so here I have a problem. We can say that saving is funds used for investment, but in that case, saving is no longer (directly) connected to the “saving” that individuals or companies do, is it? The funds used for investment are often borrowed from banks, and banks can make it because fractional reserve banking… right? I don’t see how we can get from this definition of saving to “saving is virtuous because it leads to more investment”.
“Putting money under your mattress is not saving. If someone gives you $100 and you put it under your mattress then you have indeed saved $100”
My head is spinning at this! Particularly given that in the previous paragraph you defined savings as funds for investment… shouldn’t we here be saying, “If someone gives you $100 and you put it under your mattress then you have not saved $100”? Those dollars aren’t being invested. I’m going to invent a new word to help separate out the cases: not-use. I have not-used the money under my mattress; but it’s not part of my individual savings, because it’s not invested; nor is it part of the national aggregate savings.
“the person who gave you the money has dis-saved $100”
This I understand – the $100 is no longer invested, so it’s dissaved.
“so aggregate saving does not change”
Surely this should be aggregate saving has gone down (by the saving=investment identity)?
I still can’t get around the idea that there seems to be a third thing. There’s consumption, investment(=saving), but there’s also this third possibility not-use. I don’t understand why not-use gets ignored.
I also can’t see why fractional reserve banking doesn’t effectively sever the link between personal saving/not-use and aggregate investment.
Ahmed Fares
May 18 2019 at 4:00pm
The $100 under your mattress is saving and is a result of investment. It makes no difference if that $100 is under your mattress or in a bank because saving does not fund investment. Investment is funded by credit creation.
“Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.” —Keynes (The Process of Capital Formation)
Matthias Görgens
May 19 2019 at 2:39am
If you ignore money, investing is when people in the economy produce durable capital goods but abstain from consumption.
Thanks to division of labour and transactions, the people consuming less than they produce don’t have to be the same people who make the capital goods.
Now let’s look what happens under a eg a gold standard with competitive note issue. (I found that it’s often simpler to think about money in such a system.) You produce useful things, sell them for money and stuff it under a mattress. That’s like are giving the bank that issued your notes an interest free loan. A solvent bank will have some offsetting assets on their balance sheet.
The same applies in a fiat system. Holding cash is essentially a loan to the central bank. Modern central banks tend to have government bonds on the other side of their balance sheet. (They seldom have any formal obligation to redeem their money for those assets or anything at all. Outside of eg currency boards. That’s why looking at central banks can be confusing.)
Now what happens with your loan to the note issueing bank depends on the rest of the economy. If there’s someone who right now wants to consume more than they produce and they take a loan, then no net investment has taken place.
If someone has taken a loan for durable capital goods, then net investment has taken place.
So the question about what’s investment is a purely ‘real’ one and independent of nominal questions around money.
Now where it gets complicated is that in a central bank fiat systems without competitive note issue, there can be situations where there’s more more demand for cash than there’s cash around. Hence you might get a liquidity crisis.
In those cases, spending the notes or depositing them at a bank will make a difference.
(The situation is somewhat similar to increasing hoarding of physical gold under a gold standard. But never seems to have been a problem under free banking practice.)
Under eg an inflation targeting or ngdp targeting central bank, you holding more cash is still a loan to the central. It’s just that instead of the profit motive driving a commercial bank to expand their balance sheet to meet demand for deposits/note, you have the central bank increase their balance sheet in order to meet their inflation or ngdp target.
Phil H
May 19 2019 at 6:09am
Thanks, Matthias. I still struggle with a number of the links in there…
“You produce useful things, sell them for money and stuff it under a mattress. That’s like are giving the bank that issued your notes an interest free loan.”
I’ve heard things like this before, and I don’t exactly disbelieve it, but… it’s not obvious to me! Holding my own money doesn’t *feel* like giving the bank a loan. I can’t see how it’s similar.
“So the question about what’s investment is a purely ‘real’ one”
Sure! And so is consumption. And my point is, there doesn’t seem to be an obvious and direct connection between the two. But Scott argues that there is.
Now, I don’t disbelieve him. I live in China, where consumption is low, and investment is high. The inverse relationship between the two does seem to hold on a gross level. But I can’t tell if this is a micro phenomenon, a macro phenomenon, or some combination of the two. And none of the explanations I’ve seen are convincing me.
(This is far from the only econ mystery. Econ 101 the supply and demand curves: Why the hell should a supply curve slope up? I’ve actually researched that one and have it solved to my own satisfaction, but the weird stuff in econ is all over the place.)
Mark Z
May 18 2019 at 1:09am
Well, strictly speaking, shouldn’t an economist be indifferent between more vs. less saving? Collectively (that is, for the economy as a whole), an increase in saving is necessary (and will generally result, absent some interference) if people decide to consume less of something in the present and more of it in the future. But conversely, if the relative value of something available today increases relative to how much people value it in the future. For example, if a disaster leads people to stock up on bottled water – shifting future consumption forward in time – this isn’t really a bad thing.
So, it’s not so much that saving is good per se, but that our future wealth should align with our expected future consumption. If the latter is less than the former, then we are gratuitously forgoing present consumption. Of course, in practice, people seem more likely to put themselves in situations where expected future consumption is more than they can afford than less than they can afford, but this seems like a psychological phenomenon rather than an economic one (though economists must make do with human nature all the same).
MarkW
May 18 2019 at 8:01am
the belief that healthy eating and exercise can protect against infectious diseases that, through virtually the whole of human history, have imperiled our lives.
Not that it matters for the overall argument, but infectious diseases probably have not imperiled human lives throughout all (or nearly all) of human history. The source of most deadly infectious diseases are the domestic animals humans live in contact with. But humans have not had domestic animals for most of their history. And the spread of infectious diseases requires population densities that generally did not exist before the dawn of agriculture. So, for example:
…growth in population density spurred by agriculture settlements led to an increase in infectious diseases, likely exacerbated by problems of sanitation and the proximity to domesticated animals and other novel disease vectors.
Karim
May 18 2019 at 8:22am
Highly agree. What you are explaining is closely related to the Dunning-Kruger effect
Pierre Lemieux
May 18 2019 at 11:13am
A question, Scott: Isn’t putting a $100 bill under your mattress, or even more clearly burning it, actually saving? Resources worth $100 are released for other uses. Will not part of this be likely invested, if only in inventories? Perhaps the whole $100 will be invested if it is generally known that nobody burns money?
Scott Sumner
May 19 2019 at 10:52pm
Pierre, Let’s start by assuming the money stock is fixed. Then if I choose to hold an extra $100, someone else must hold $100 less. So aggregate saving does not change. Alternatively, if the money stock rises by $100, then the public may save an extra $100, but the government dissaves that amount.
Whether putting $100 under the mattress represents saving for me as an individual depends on where the money came from. Suppose I sell $100 in stocks and put the cash under my bed, have I saved anything?
John Trainor
May 18 2019 at 4:39pm
Thanks to Scott Sumner for introducing and addressing this sub-topic and to Phil H. for voicing a longstanding puzzlement I share.
I’m currently finishing my 3rd year teaching Advanced Placement Macroeconomics. Macro has been the field of economics I’ve found least interesting, perhaps because it seems to me the most difficult. An aside: like Scott, I started my graduate education in economics with price theory, in my case auditing Deirdre McCloskey’s Ec 300 class. Scott and I might have been in the same classroom and possibly at the same time (Fall 1977 for me). I’m doing my best with Macro and have filled in most of my intro-level gaps. A few remain, notably the Savings/Investment identity and some related issues.
In my intro-level classes, assuming savings is identical to investment has, I think, unaddressed consequences. Perhaps Grandma putting cash in her mattress, a non-use as Phil H. puts it, is not significant in itself. However, income is divided into consumption and savings: MPC + MPS = 1; in our simple models, the marginal propensity to consume plus the marginal propensity to save account for all income. The spending multiplier is built on this relationship, ultimately as equal to 1/MPS. In AP Macro, we use ridiculous examples like MPS = 20% or even 10%, resulting in wonderful spending multipliers of 5 or 10, respectively. For rigor, it seems to me that Phil H.’s non-use should at least be a term in the equation, MPC + Non-use + MPS = 1. Counter-intuitively, I try to think of the cash in Grandma’s mattress as consumption, not savings.
There’s another puzzling consequence for which I have not found a satisfactory explanation. Introductory textbooks typically show money market and loanable funds graphs side by side. The y-axis on both is an interest rate; money market nominal and loanable funds real interest rate. I’ve never seen an attempt made to show these consistently, with the money market graph reflecting the nominal rate as the sum of the real rate and inflation; instead, the inflation rate is assumed constant and Fed actions are, in effect, assumed to have changed the real interest rate. The side-by-side treatment and Fed-adjusts-real-rates assumption seem non-rigorous to me. The demand for loanable funds is more or less—more, I think–the demand curve for Investment.
Krugman’s textbook describes a process: the Federal Reserve increases the money supply, reducing the [nominal] interest rate; the fall in the interest rate leads to an increase in Real GDP, which generates an increase in savings through the multiplier effect; the rise in savings shifts the supply curve of loanable funds rightward, also reducing the equilibrium [real] interest rate in the loanable funds market; “and we know that savings rise by exactly enough to match the rise in investment spending”. I think I can now express my perplexity in simple terms: this means that the Savings & Investment identity is used to reconcile immediate adjustments in interest rates (financial markets are quick) with inherently non-immediate adjustments in Investment. How can these be identical?
Scott’s excellent new textbook explains that financial savings in aggregate nets to zero, as he helpfully explains above. For example, a person who buys stock “saves”, but the seller “dissaves”. I don’t think it shows the money market and loanable funds market in the side by side format which troubles me.
Scott Sumner
May 19 2019 at 10:26am
Hi John, I think I do recall you were in the same McCloskey class. Good to hear from you. I am currently traveling, but will try to address this issue when I return.
Ahmed Fares
May 19 2019 at 3:45pm
An Eskimo can do one of two things, catch seals or build igloos.
Suppose that on a given day, he catches one seal which he consumes and builds one igloo. If you ask the Eskimo to point to his investment, he points to the igloo. If you ask the Eskimo to point to his saving, he points to the same igloo. This is how saving equals investment. It is an identity, true by definition, and true at ever single instant in time.
“Saving is the accounting record of investment.” —Basil Moore (Shaking The Invisible Hand).
Asking how saving always equals investment is like asking how the right side of a balance sheet always equals the left side. But there is only stuff on the left side of the balance sheet. The right side is the claims that people have on the stuff on the left side. As assets rise and fall, claims rise and fall in the same amount.
What is true for a single Eskimo is equally true for a tribe of Eskimos who specialize. At the end of the day, there is a trade and distribution of seals and igloos. Leftover seal meat is inventory, i.e., an investment.
Now of course it gets more complicated when you introduce money into an economy but the same principle of saving matching investment still applies.
Brandon Berg
May 19 2019 at 8:44am
I think your model here mischaracterizes the typical anti-vaxxer. I’m sure there are some people who actually do try to free ride, but my read of the vast majority is that they believe that vaccines don’t work, or are not necessary for people with sufficiently healthful lifestyles, and also that they vastly overestimate the risk and severity of side effects.
I’m also not sure that this has anything to do with education as such. It’s not taking biology in high school or college that turns people into anti-vaxxers, but seeking out information about health on the Internet, and finding outright misinformation. It’s not that they learned just enough to be dangerous; it’s that they’ve learned a bunch of things that aren’t true.
Possibly intelligence in a certain range, and curiosity, may make people more prone to this, but I’d be surprised if legitimate education were an independent risk factor.
ChrisA
May 22 2019 at 1:26am
Unfortunately I have a couple of anti-vaxxers in my family. They have no real formal education beyond high-school which is contra to the OP experience of highly educated people, although they are fairly intelligent people. I try not to engage with them too much on the subject since it makes me upset and doesn’t seem to have much impact on their views, but their primary concern seems to be the risk to their children from vaccines. Their stress about the vaccinations seems to come from imagining the guilt that they would feel should their child be damaged by the vaccine. They read the stories about kids becoming autistic after vaccinations and they imagine themselves in the position of the mother after that event. I think there is probably some kind of evolutionary psychology going on here, about exogenous stuff (like disease) not being worth worrying about, but you should try to be as conservative as possible in your own actions if you are ignorant about how things work, probably this is an effective strategy in olden days.
If this is true, probably the current strategy of the trying to activate the guilt complex of the anti-vaxxers about risk to others is not going to work, they are concerned about regret costs which far outweigh any altruistic tendency. I also wouldn’t bother about educating on relative risks because I think that just activates their suspicions that they are being tricked to put their child at risk for the benefit of society as a whole. I would be publicizing grieving anti-vaxxers whose children did die or get seriously ill, showing how the regret costs of not vaccinating is also significant, with particular focus on wringing of hands by the mother as to why she didn’t listen the experts.
Comments are closed.